In the era of peak quantitative easing (QE), there weren’t many options out there for investors seeking a little bit of yield.
Government bond yields were ultra-low, corporate debt yields, especially for investment grade, weren’t much higher, while commodities and cryptocurrencies and, in most instances, cash, didn’t even offer yields.
That meant the only palatable option for those looking for income was to pile into stocks given a lack of alternatives elsewhere.
And pile in they did, powered by the mindset of, TINA, or “there is no alternative”.
Stocks soared around many parts of the world, especially in the United States, scaling record peaks in many cases.
That was until just a few months ago.
Suddenly, the TINA trade stopped working.
In an era of monetary policy normalization, growing US fiscal deficits and stronger global growth, there was suddenly another alternative to stocks for investors seeking yield: short-dated US Treasuries, a considerably safer option than stocks that sit further out the risk spectrum.
“For much of this cycle, the ‘TINA’ argument held for stocks,” BAML says.
“Bonds’ elevated rate risk and zero-yielding cash allowed stocks to handily win the asset class beauty contest. But cash yields today are higher than the dividend yield for 60% of S&P 500 stocks.”
As seen in the chart below from Bank of America Merrill Lynch, TINA now has some competition with short-dated US government debt now offering higher yields.
And BAML says say that competition will only grow fiercer in the year ahead should the Fed continue to normalise policy settings as it expects.
“Our Fed call puts short rates close to 3.5% by the end of 2019, well above the S&P 500’s 1.9% dividend yield,” it says.
While a slightly ominous outlook for stocks, particularly at a time when the global economy looks like it’s already past its cyclical peak, BAML says the S&P 500 will probably recover its recent losses in the period ahead.
“We suspect that we see a peak in equities next year, but bearish positioning and weak sentiment in stocks present upside, especially if trade risks subside, keeping us constructive for now,” it says.
“We expect upside to equities through year-end and into next year and thus maintain our 2018 year-end target outlook for 3000 on the S&P 500.”
BAML then says the index will begin to trend lower, seeing it end 2019 at 2900. It currently sits at 2642.